What Is Private Mortgage Insurance (PMI)?

We are often asked "What is PMI?", "Do have to pay it?, and "How can I avoid paying Private Mortgage Insurance? In this article, we will briefly explore Private Mortgage Insurance, explain the role that it plays, when it is typically necessary and how you can avoid paying it.

What Is PMI?

PMI is a type of mortgage insurance that is required when a buyer makes a down payment of less than 20% of the home's purchase price. It serves a dual purpose of allowing homebuyers to buy a home with a lower up-front cost and protecting the lender if the buyer defaults.

The annual cost of PMI averages between 0.58% to 1.86% of the initial loan amount. For example, let's say you made a 5% down payment on a $300,000 home. The PMI cost for your $285,000 mortgage would likely be between $1,653 to $5,301 per year or around $137 to $441 a month.

The cost of PMI depends on a few things, including:

  • Down Payment - If you put down more money upfront, your PMI will cost less overall.
  • Loan Amount - If you have a larger loan, you pay more for PMI.
  • Credit Score - The lower your credit score is, the higher your PMI rate.
  • Mortgage Type - PMI rates depend on the type of mortgage you have. For example, PMI costs less for a fixed-rate mortgage than for an adjustable-rate mortgage.


What Role Does It Serve?

Private mortgage insurance protects the lender's investment. Since the lender is taking more of the risk upfront by offering a lower down payment, PMI provides some coverage if the buyer defaults on their loan.

PMI allows lenders to offer as low as 3% down payment rates. This is beneficial for homebuyers who don't have enough saved to make a 20% down payment. However, it also means that the buyer will have a higher total repayment amount due to the addition of monthly PMI payments.

PMI is not a protection against foreclosure. Nor does it protect you from deductions in your credit score if you fall behind on mortgage payments.

When Is It Used?

PMI is required when a home buyer makes a down payment of less than 20% of the home's purchase price. It's also usually required if you refinance your home with equity equal to less than 20% of the home's value.

How Can a Homebuyer Avoid It?

The primary way to completely avoid making PMI payments is to put down a down payment of at least 20%. Otherwise, the lender will likely require the homebuyer to purchase PMI.

However, once the borrower meets certain conditions, PMI payments can be dropped. For example, PMI can be canceled once the mortgage principal balance falls below 80% of the home's original value. If this happens, additional requirements need to be met before the PMI is dropped, including a history of on-time payments and a lack of other mortgages.

Before applying for a mortgage, take a close look at the pros and cons of getting a loan with PMI. Some loans that don't require PMI may have higher interest rates than those that do.




We hope this article was of value to you. For more great tips, bookmark our site and for all your mortgage needs, visit the A Team at TMFFMS.


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